Save the taxpayer!

There is no case whatsoever to nationalise more banks, let alone for taxpayers to be made to take equity stakes in all the banks. There is a new kind of madness stalking the government world, as the governments lurch from one inappropriate response to another in response to a fast moving banking crisis. Governments helped create the crisis, by keeping interest rates too low and looking the other way as the banks and Shadow banks heaped debts on debts. Then governments helped bring the crisis on by keeping interest rates too high and refusing sensible help in the early stages of the crunch.

Governments should look after taxpayers. Taxpayers cannot afford to nationalise the banks. If governments assume too many new risks by taking on the assets of the banks or buying them up, it merely shifts the problems from the private sector to the public sector. It does not solve it. The problem will then become how do governments pay all the bills? How can they finance themselves in a non inflatonary way? How high do taxes have to go? A banking crisis does not suspend the laws of public finance. Buying bank shares is just like hiring teachers or buying more paperclips for a government office – only less popular with the taxpayer.

The public will be angry if governments do this. The feeling will stay abroad that there is one rule for bankers and one rule for everyone else. All the other businesses that will now go under thanks to the hostile economic climate will not enjoy a bail out because they have “got it wrong”. The senior bankers paid themselves huge bonuses and salaries in the good times, so why should they benefit from a rescue when their businesses go wrong?

Some of the world’s banks should be put through administration because their balance sheets are blown to pieces by the changed climate. Many need appropriate action by the authorities to help them through the crisis. To do so the authorities need to stop misrepresenting the true problems.

This is not just an American crisis. It is also a European one.

Interest rates are far too high in Europe and the UK. What does it take to get the hopeless MPC and the ECB to recognise this? Do they want the whole banking system to melt down before they see the problem? Will they accept their responsibility for fuelling the inflation in the first place? When will they see the problem is no longer inflation but massive deflation?

This is a crisis of confidence in asset values, brought on initially by too little liquidity in banking markets. Will authorities now solve the short term liquidity problem with whatever it takes as they promise to do? They have at least made moves in that direction in the last few days, a year too late. Will they go on to require the banks to solve the capital adequacy problem by insisting they raise new capital from anyone but the local taxpayers who have no wish to go to the rescue of their local banks under the management of national governments? Again, this is something the banking regulators should have required last year as the crisis began.

Usually watching authorities around the world I reckon they do the right thing when all else has failed. This time I am not so sure.

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29 Comments

  1. mikestallard
    Posted October 6, 2008 at 8:57 am | Permalink

    Don't banks like Barclays and NatWest think in trillions? If they had a run on them, how could the wretched government pay up within a week, whatever?
    The government earns, in tax, in a good year, some £700 billion. they are way out of their depth here. Even the US government thinks in billions.
    With the dismal record on child benefit, the Dome, the farming subsidy under Margaret Becket, or the IT fiascos in the NHS, they don't seem even able to pay for their own ideas!
    Pretty soon, I totally agree, there are going to be some stories about single mums being driven into the snow, clutching their little baby in their ragged arms (just like Victorian paintings).
    This time, though, Scrooge in the top hat will be, of course, Gordon Brown.

  2. APL
    Posted October 6, 2008 at 9:14 am | Permalink

    JR: "There is a new kind of madness stalking the political world .."

    Mr Redwood, there is no crisis so mild nor so dire that politicians will not cynically take advantage of it to expand their own domain.

    This is a serious crisis, but the response is profoundly illiberal, I can see shortly, now that the government has essentially nationalised the banks, it will bring in controls on how much money one may hold.

    Expect the term 'hording' to gain currency on the governments BBC propaganda output. People who's rational response to a crisis will be to stock up on food, essentials and even cash, will start to see a campaign of villification in the media.

    Oh, and with higher levels of cash in everyone's homes, expect the police to do nothing to defend the population against the inevitable rise in crime.

  3. Tony Makara
    Posted October 6, 2008 at 10:00 am | Permalink

    I'm totally against the idea of the state bailing-out or nationalizing failed lending institutions. However I believe it would be a good idea to have a newly established state bank, one which could offer savers a steady, if modest, rate of return, and could be a genuine help to the business community through govt backed loans that could be issued and later recalled and destroyed, so that money can enter the system, though not stay in the system one the original debt has been payed off. Of course there could be a problem with default, in which case loans to business would have to be modest and secured, that is supporting already healthy business concerns. A new state bank, yes, propping up the old failed lenders with public money, no.

  4. Callum Wood
    Posted October 6, 2008 at 10:08 am | Permalink

    "A banking crisis does not suspend the laws of public finance. "

    This is quite true; however it seems that many politicians in both Westminster and Washington appear to want to throw as much money out of the public purse as possible.

    The extension of this argument: If/when the financial crisis is resolved the taxpayers are going to be hurt just as much as they would had NR or B&B gone completely bust.

  5. Posted October 6, 2008 at 10:50 am | Permalink

    Arguably Labour's greatest curse is their desperation to be seen to be doing something. Their decision to nationalise banks is simply a reflection of the choice between doing nothing and doing something. Labour will nationalise anything in sight at the moment because they know that the political gains of being seen to be doing something outweigh the long term economic pain that the Conservatives will feel in 2010.
    http://lettersfromatory.wordpress.com

  6. Tim Skinner
    Posted October 6, 2008 at 10:51 am | Permalink

    It is not clear that banks can raise more capital – if investors (or indeed the taxpayer) put £5bn into a worthless bank raising its value to £1bn, they have thrown their capital away.

  7. Posted October 6, 2008 at 12:02 pm | Permalink

    A cut in interest rates will do nothing for the taxpayer. The banks will simply use it to expand their margins on loans and mortgages and reduce their returns on savings. Given that the Irish initiative on savers' deposits has now been followed by Germany and others in the EU this second point means that savings will inevitably seek better returns elsewhere which, as we saw last week following Ireland's announcement, will only make the issue of liquidity for UK banks worse not better.

  8. Lola
    Posted October 6, 2008 at 12:08 pm | Permalink

    Absolutely. And it needs to be very clear to the banks that they cannot rebuild their balance sheets at the expense of their customers balance sheets. Banks are the only businesses on the planet that are able to do this. Personally I have just had a converatsion with our bank 'manager' who criticised our balance sheet – and we are a partnership with assets many many times our very modest borrowings – and requested that we strengthen our balance sheet by reducing our very modest overdraft! I pointed out that, one, our balance sheet was at least comprehensible and two assets plus equity well exceeded liabilities which was more than could be said for theirs. We are just one of the many small businesses whose balance sheet will be plundered to rebuild our bankers balance sheets. As the banks are a de facto monopoly they need to be taught a very tough lesson and administration is the answer. Out of the ashes of the current system must grow better, smaller, properly capitalised banks that operate well in local areas. The City can have all the big banks operating internationally or for international clients but locally some form of responsible 'narrow, banking is an absolute requirement.

    Unfortuneately I have absolutey no confidence in this happening under either Labour or Tories. You are both to welded to the money they give you, and anyway under socialism everything trends to monopoly.

    • mikestallard
      Posted October 6, 2008 at 6:17 pm | Permalink

      So what is to stop some enterprising young fellow (or "guy") setting up a small bank based on personal knowledge of a local situation?

      • APL
        Posted October 7, 2008 at 12:08 am | Permalink

        MikeStallard: " what is to stop some enterprising young fellow setting up a small bank .. "

        I theory nothing. He could even put a fraction of his clients cash into something solid like, gold or silver, the rest could be loaned out with the agreement of the lender for a risk premium – otherwise called 'interest'. His bank notes might bear the legend, "I promise to pay the bearer on demand 1/10 of one ounce in gold.", at todays price that would be £50 each.

        Or he might start something like http://goldmoney.com/

        Of course, if he accumulated too much gold or silver, he would be too juicy a target for government to ignore. Bet you he would be nationalized before you could say 'RBS'.

  9. Adrian Peirson
    Posted October 6, 2008 at 12:27 pm | Permalink

    Any other Business would have been allowed to fail, that's how Natural selection works, that's what ensures only business that operate sound economic / cultural policies will flourish for the Betterment of Society as a whole.

    What you are saying Mr Redwood is echoed here by Sen Ron Paul in the US.

    Putting a Trillion dollar debt on the Publics Tab enslaves us into repaying a massive loan we never asked for.

    And as for Gordon Brown gauranteeing depositors Money, how exactly does the British Government intend to gaurantee over a Trillion dollars of Deposits.
    This lunacy is further exposed when you remember Our money is no longer actually worth anything as it is no longer bsacked by Gold or Silver, it is essentially worthless paper.
    Russia and China I understand are tio begin Issuing Gold and Silver backed Currency, when that happens, People will dump the Dollar and Sterling in favour of that security.
    It wont be Pretty, and even though we willl suffer, I think it is for the Best, Our current monetary system is a scam, it is a Ponzi scheme and If Putin and china destroy it, Long term, that is probably for the best.
    People have to realise that the Money in your Pocket is not Money, it is the receipt for Real Money, IE Gold and Silver held in storage by the Banks, the same Gold and silver that is now NOT connected to the receipt in your Pocket and was sold off dirt cheap by Brown to Whom I wonder.
    Essentially, the Global Elite took the Gold and left us holding just receipts.

    http://uk.youtube.com/watch?v=YBVB1Uc0nko

    • Tony Makara
      Posted October 6, 2008 at 4:49 pm | Permalink

      Looking at the wider perspective the capitalist system will always be hostage to varying degrees of inflation because of the way that interest creates a demand for money that does not already exist, sadly though some people become confused about this because too high a rate of interest dries up the demand for credit, so they wrongly equate higher interest rates with being an anti-inflationary measure, when in fact it is the restriction on liquidity that pulls inflation back. Unless and until the state becomes the sole issue of interest-free credit there will always be inflationary pressures as borrowers have to price the cost of above-inflation interest into goods and services. Usury is and always will remain the problem because the dynamic it creates undermines the value of currencies.

    • mikestallard
      Posted October 6, 2008 at 6:23 pm | Permalink

      Putin runs a rogue state where people find their assets plundered at will. BP? Anna Politkoyskaya?
      China has the trillions necessary to bail out everyone! What I don't like, myself, is its recent history of (word left out)starving the peasants to death in their millions. (More words left out)Do you personally want to bank with either of these people?

  10. Posted October 6, 2008 at 12:27 pm | Permalink

    Assuming the Conservatives do roughly follow your thinking it will be slightly strange to see the representatives of Labour & presumably LibDems bailing out the bloated capitalists & the party of the toffs opposing it. Perhaps we are seeing the final collapse of the concept of right V left as opposed to libertarian v statist.

    While I think the taxpayer will have to guarantee all deposits & perhaps all interbank loans. This can be done by an administrer in bankruptcy or a takeover just before bankruptcy which places zero value on shares.

    What I am worried about is the Japanese precedent – they put all their effort, following the 1991 proprety crash, into ensuring banks which were bankrupt were propped up. They saved the banks but at the cost of going from nearly 10% growth to zero for the next 14 years. Much better to have a painful but short crash.

  11. DBC Reed
    Posted October 6, 2008 at 12:55 pm | Permalink

    If the banks have to be recapitalised (and Mark Wadsworth's debt/ equity swap scheme is best),this tends to indicate they are operationally insolvent not just short of liquidity. That being the case ,nationalising them is not going to cost much as the businesses are worthless and are ,in many cases ridden with debt.In fact, in the past ,nationalisation was greeted with relief by the owners who no longer wished to continue the struggle.
    There is also the democratic element.People are flocking to banks which have the credit of the nation behind them or deposit guarantees and not funny money deposits of collateralised debt provided by the Invisible Hand of Free market economics.As the saying goes you can't buck the market .
    One problem with nationalised High Street banks seems to be European unfair competition legislation.But as the Germans ,Irish and Greeks have driven a coach and horses through that convention by providing the unfair competition of state guaranteed banks , so it is time for Mandelson etc to revisit their Clause 4 pasts and look at schemes for the " public ownership of the means of…. exchange"

  12. Mark Cannon
    Posted October 6, 2008 at 4:18 pm | Permalink

    But isn't the problem that rights issues have been tried, for example, with Bradford & Bingley. Shareholders/investors will not subscribe for more shares if they are worried that it would just be throwing good money after bad. What is the answer then? I ask as an instinctive free marketer.

  13. Acorn
    Posted October 6, 2008 at 7:20 pm | Permalink

    Don't you just love it when all the EU countries stick together and demonstrate common thinking and purpose in a crisis. Just can't see why people criticise such a fine institution.

    Nurse! … bag him; V-tach; stand clear; shocking at 360 Joules …. OK, sinus rhythm. No, that wasn't an episode of Casualty, that was my investment manager today.

  14. no one
    Posted October 6, 2008 at 9:06 pm | Permalink

    I hope when the conservatives get in they sort out this nonsense of so called security checks at our national airports

    I've just been through a few more of our airports and its ridiculous, this is not going to stop any terrorism, but boy is it good at causing maximum inconvenience to the ordinary citizen

    And the checks are so different between airports, how come some want your laptop out of the bag, others not, some want your belt off others not (why do we all have to stand around with our trousers falling down?) some you can get on board with no photo id, others your passport is gone over with a fine tooth coomb?

    Heathrow playing with its web cams and messing us around standing on the X (there's already a photo in my passport you dummies)

    So much time wasted queuing

    This is not the way to run a country

    (sentence left out)
    Who is kidding who?

    My godson has a few quid in his kiddie bank, he will be buying a bank soon, and then you'll have to listen

    Oh how we laughed

  15. StevenL
    Posted October 6, 2008 at 10:59 pm | Permalink

    Is anyone else thinking the Americans might try and inflate their way out of this mess?

    Actually, unless you're China or Saudi Arabia, is this such a bad idea in the long run?

    • mikestallard
      Posted October 9, 2008 at 5:41 pm | Permalink

      Yes, it is an awful idea.
      Since the abandonment of gold, the dollar has been the currency which people depend on when they need a solid currency to work on. This is as true today in Zimbabwe as in the Middle East.
      If the dollar goes down, then there will, at least for some time, be no solidity in anyone's pocket. It will be as if gold turned into base metal.
      A lot of people (including my own son) will be ruined.

      • StevenL
        Posted October 9, 2008 at 9:36 pm | Permalink

        When you put it like that then yes, I guess it is an awful idea. Fingers crossed the government interventions work then.

  16. Posted October 7, 2008 at 7:35 am | Permalink

    Businesses need to be saved otherwise millions will be out of work. This will lead to loss of tax revenue and depression unless government intervenes directly on behalf of taxpayers.
    Government should make a pot of taxpayers money available to loan direct to struggling businesses and to new businesses.

    It should remove the threat to business by offering taxpayer loans to business in order to keep them liquid and save jobs.

    Russia did this a fortnight ago.

    Limit the affects of banks 'power' on our society by making alternative funding available at interest rates and loan payments which are affordable and geared to the business, and put people first by saving jobs.
    Our manufacturing base and infrastructure must be protected.

    The banking sector should revitalise itself by raising more capital through the sale of shares.

    No one is seeing the obvious problem by the USA's $250,000 deposit guarantee which will inevitably mean some European depositors will be moving money to the U.S. So savings rates here must either be improved or tax on the returns must be lowered to make saving here more beneficial.

    Forget the free market because the only one's paying for it are British homeowners as the whole of Europe has enjoyed the ride on the British public's personal indebtedness.

    Our home equity has driven Europe.
    Our balance of payments deficit proves we buy more from Europe than they do from us, and its clear that without a housing boom in Britain enabling tens of thousands of British homeowners to take money from their homes, many European house builders would likely not be in business.
    Same with European car manufacturers.

    It is OUR debt that's keeping the "free market economy" on the road and it's time to put a stop stop it.

  17. Posted October 7, 2008 at 5:37 pm | Permalink

    David Cameron should suggest that the government considers emergency legislation to prevent families being evicted under repossession until the economic crisis has been stabalised.

  18. Blackacre
    Posted October 8, 2008 at 9:30 am | Permalink

    Problem is that Banks are different. It has proved impossible to get through this with conventional measures so I think the government is right to hold its nose and bail them out. It is unpalatable but the best way of getting money moving again. Letting Lehman go should have been the right decision on normal thinking, but appears to have made the banks more nervous.

    And I do not think the Conservatives would in office have done much different.

  19. Dr Dan H.
    Posted October 9, 2008 at 11:43 am | Permalink

    What is most irritating about this crisis is what this most inept of Governments is not doing. As things stand, they have signed the taxpayer up to a huge new set of liabilities, but have yet to make any noise whatsoever about curbing their own extravagant and reckless spending of taxpayers' money.

    So, ID Cards still haven't been abandoned, the NHS Plan for IT still has not had a merciful stake through its heart, and lo and behold but the morons are planning a mega-database of communications, which will do little save for promoting the use of strong encryption.

    Similarly their insanely-measured poverty targets are still having money thrown at them in the vain hope of finding a solution, and the low-paid and benefit-dependent classes are still subject to iniquitous rates of marginal taxation.

    How's about these silly buggers in Government ceasing playing fast and loose with taxpayers' money, and putting their own house in order first?

  20. Michael Corby
    Posted October 10, 2008 at 7:30 am | Permalink

    Yes – spot on.

    What is being overlooked is that there are solvent banks. Moreover even the insolvent ones have realizable assets. The notion that those who got into the mess are the best to get out it is absurd. The solvent banks illustrate the fact that is was possible to run a bank properly over the last decade.

    The other point is that this crisis does not have its origins in the capitalism: just the opposite. the Clinton administration actually fostered the provision of mortgages to lower socioeconomic groups who, normally, would never have obtained loans. The Uk government and regulators stood idly by while mortgages of over 100% were offered and 6 times income.

    The UK base rate was kept artificially low as a result of having property prices excluded from the inflation target. This is now working against reductions as the myopic Governor of the Bank of England has stuck to the narrow targeting.

    As to the financial sector regulation is needed to ensure competition. We have had a state of oligopoly, which is going to be made worse by the "sweet heart" takeovers. Adam Smith never advocated "free for all". We need to have, not detailed regulation, as supplied by the FSA, top level regulation to preserve competition and ensure separation of functions.

    Finally there is no crisis so bad that governments cannot make it worse. We will live to rue the day of the days of the packages in the UK and USA.

  21. Adrian
    Posted October 10, 2008 at 4:45 pm | Permalink

    This blog has the right idea in terms of the principles involved, however the real problem is that we are all tied into these financial institutions through a variety of "products", retirement savings being one. Western societies have tied so much of their wealth in to this financial system that we are all going to take a bath, whatever happens. It would seem to be a case of taking our lumps now and then making sure that, via a strengthened regulatory framework, this cannot occur again.

    Most responses here still show the same need to blame the government for all problems. Damn the government for not raising interest rates to control us in our desire to indulge ourselves. Now if they had done so I wonder if any blog responses would have lauded them.

  22. Dennis
    Posted October 11, 2008 at 11:01 am | Permalink

    The Government – is to blame for the avoidable situation that the country now faces. There are millions of pensioners looking on in disbelief; people who have lived through this type of nonsence on a number of occasions. Harold Wilson: 'Just tighten your belts for two more years', and here we go again. Would'nt pay these polititians in washers let alone give them further responsibity; control of hand-outs funded by the taxpayer.

  23. Posted October 12, 2008 at 10:30 am | Permalink

    The problem is the direction of travel of the tier 1 capital ratio (and tier 2). The provision of the facility for some subordinated debt gives certainty that the solvency ratios will be maintained and hence depositors cash is secure. HSBC, for example, have stated they won't take advantage of this. Any bank that does take up this facility will end up undermining shareholder value. That is about right.

    Subordinated debt, however, takes a higher priority than equity so this is a good role for government.

    It also prevents having to nationalise the banks which we really don't want to happen.

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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